If business prospers and proliferates, the economy is doing splendid, and is believed to be benefiting everybody. This attitude partially explains the reason why some felt that there must have been some kind of a villain to be blamed for the existing economic mess. Irresponsible banks must have granted one too many loans, while bad-faith customers must have defaulted on one too many mortgages. If the booming years preceding the crisis were beneficial to all, there must have been somebody secretly opposing the prosperity shared by numerous businesses and investors.
To my mind, seeking for the cause in the financial sector is a very superficial approach, like treating a broken bone with a Band-Aid. The recent craze for securitization has made an impression on some investors that finance will always remain independent from the rest of the economy. Although it is officially recognized that financial relations reflect the underlying economic processes centered on money-commodity relations, this understanding gets easily brushed off when greedy bulls take over financial markets. As a result market players forget that a debt, even if re-packaged many times, still remains a debt, likely to drop in value if a sufficient number of debtors behind it default on their payments.
Since some people’s liabilities are other people’s assets, the financial world has eventually taken this concept of “debt being an asset” to the extreme by transferring it into money-minting. What assets stand behind the fiat currency of an average developing country? Its central bank’s gold and foreign exchange reserves do, the gold obviously playing second fiddle in this duet. Developed countries convince emerging economies to accept their currencies as assets and scream blue murder when their free-market apprentices even dare to think about issuing local currency above their foreign exchange reserves. To satisfy their teacher’s demands, student countries have to continually sell something on world markets to bring in foreign exchange so that they can be allowed to print more local currency.
Central banks hold various financial assets including government bonds, which also back their currency issuance. Surprised? Technically, a central bank does not need any other “assets” but government bonds to issue money and lend it out to commercial banks. Then fractional-reserve banking does the rest as the debt-backed money gets lent on and on thus providing the financial resources that set capital reproduction cycles in motion throughout the economy. And this is exactly what occurs in developed countries. So much for the “economic might” that backs their currencies as economics books often claim! The US dollar being the most vivid and obvious example, I think we should leave this point and move further.
Thus, in our day and age, debt is money. In fact, debt is the very blood of modern capitalism. I trust that those who are now reading this article realize quite well who will ultimately pay off government debts. Both developed and emerging economies are learning this lesson the hard way at this present moment.
But if the widening wage-productivity gap is to be considered as the cause of the current global crisis, which has been already confirmed in a recent report by the United Nations Conference on Trade and Development, the reasons to be euphoric about the recent debt-generated economic growth are questionable. As the gap widens, ultimate consumers’ incomes tend to lessen, which reduces their ability to take out new loans and refinance previous ones. This places the entire financial system (and the entire economy as a result) in great danger as this Ponzi scheme of debt comes to be resting an ever-narrowing foundation.